The payment ecosystem has been gradually growing over the past years. When we conducted research in 2021, we found that over 80% of business leaders are prioritizing increasing cash management and payment efficiency and maximizing cash flow liquidity.
Current market trends, such as automation of payments, developing an integrated technology framework, complying with regulations, as well as the emerging need for tackling payment fraud have all been drivers for enterprises to adopt payment hubs. Payment hubs have also been going through transformational times to meet the needs of the enterprise users for better connectivity, improved security, and even more visibility into cash positions.
While the transition to a payment hub is a complex project, the investment is well worth the benefits. In this article, we will look at what a payment hub is and what its key features are, how enterprises benefit by using payment hubs, as well as the importance of fraud prevention.
What is a payment hub?
A payment hub is a platform for enterprises for executing their payments. Payment hubs improve control and visibility over outgoing enterprise payments, reduce the chance of fraud, and add a layer of operating efficiency. Payment hubs ensure that the organization can comply with ISO20022 as well as its own payment policy. While payment hubs are preferred when a company has operations globally, it can be a useful software even when a company is only doing business locally especially if there are multiple bank and system connections involved.
Payment hubs can handle all payment types and work with different payment file formats and it works just as well for international payments as for P27 payments.
A payment hub is not solely the requirement of the treasury and finance departments, but CIOs are increasingly requesting the implementation of a corporate payment hub for reasons such as improved security that’s a prerequisite for compliance as well as the significant reduction of the work that’s requested from the IT department.
The payment hub architecture is designed so that the platform sits between the banks that the organization is using and the corporate ERP system(s) (one or multiple), treasury management systems, and any other internal system where payment files are stored.
You may have also heard the term ‘payment factory’. This term is often used for a combination of a platform that automates the payments as well as the workforce that is handling the payment processes.
Fully integrated payment hub: what does this mean in practice?
A global payment hub solution must be fully integrated into the organization’s technology framework. Buying a payment hub software is rarely the sole decision of the finance and treasury departments as it often requires work from the IT department. At the same time, it’s also a purchase that can be beneficial for IT as it can significantly reduce the work needed to create and manage bank connections and set up integrations with the internal technology stack.
The payment hub is always connected to the banks that the organization is using. Depending on the bank and the requirements of the company, bank connections can be created via host-to-host connectivity, local connectivity options (e.g., EBICS), or through the SWIFT network. Working with a payment hub provider that has an extensive number of bank connections can speed up the implementation of the payment hub as IT do not need to start from ground zero to set up the connections.
On the other end, the payment hub needs to connect to various systems, such as ERP systems (often SAP), sometimes even multiple ones especially when the company had mergers and acquisitions, treasury management systems, as well as other financial systems. It requires significant know-how and man-hours to complete integration projects, especially if there are legacy systems with proprietary data formats. During the last decades, APIs and data standards have been becoming more common and this development has made it easier to connect to data sources and enable two-way communication between systems.
An overview of the typical payment hub architecture
The image below shows the typical payment hub architecture where the payment solution sits in the middle between banks, ERPs, TMS, and other financial systems as described above.
Challenges of implementing a payment hub
The biggest challenges of implementing a payment hub relate to bank connectivity and integrations.
It can be beneficial to find a payment hub vendor that also offers bank connectivity as a service. In that case, the vendor already has a number of host-to-host connections readily available, as well as the possibility to connect to banks via the SWIFT network.
Buying bank connectivity as a service is beneficial, as IT does not need to create the integration and they also do not need to maintain the connections in the future. Bank connectivity is something that also decision-makers have found extremely valuable and useful in our Forrester study.
On the source system side, when there is a well-documented API as an endpoint and modern standardized data formats, the integration is a lot less challenging than when there are legacy systems and proprietary formats on the other end.
While you cannot avoid getting support from your IT department, a vendor that supports you with the implementation will be beneficial for the success of the project.
Key Features of a Payment Hub
The main objective of using a payment hub is to automate and simplify local, cross-border, and global payments by importing all your payment files from the source systems. Payment hubs typically offer the following functionalities:
Centralized payment processing
With a centralized payment hub, companies can optimize the overall control and efficiency of the payments processes. The hub collects payment files from various systems before bank transmission. The payment hub is set up so that all banks and source systems are connected and the data mapping has been carried out for necessary payment file format conversion so that all the systems can automatically communicate with each other.
While the main objective is the automation of payment flows, sometimes it’s still necessary to create and send manual payments such as tax payments, customer credits, travel expense claims, and more.
Approvals can be a fully automated process with up to six multi-approvals for safety measures.
Sending & Feedback
The payment hub is configured though that it’s possible to send payment batches to banks in the correct bank-specific format and receive automated bank remit feedback.
Monitor & Reconcile Payments
Within the payment hub, users can browse, search, and view individual payment files and payment batches to monitor and reconcile payments throughout their entire end-to-end lifecycle.
Audit log for regulatory compliance
For security and compliance, payments hubs tend to provide users with payment history logs and audit trails for all processed payments.
Anomaly detection & sanction screening
Financial fraud is a rising problem. Some payment hub providers have developed tools for anomaly detection to identify fraudulent, irregular, and erroneous payments with rule-based anomaly detection functionality. False positives typically require a separate review.
Sanction screening is also a topic you may have been hearing a lot recently. When you adopt the sanction screening feature, you can screen your payment files against sanction lists and blacklists before sending payments to your designated bank. This screening facility allows you to automatically detect, identify and stop payments that should not proceed further.
The benefits of a payment hub
At this point, you may already understand the main benefits of implementing a payment hub whether it’s for local payments or global payments, but we have collected some of the main benefits of it.
One hub for all payments – automated & manual payments
While the main purpose of a payment hub is automation, being able to create manual payments and manual payment templates can be just as important. The payment hub can also go beyond Account Payables (AP) processes – depending on the integration level, it’s also possible to automate for example salary payments.
Centralized control can be important especially when the company operates in many countries and has many subsidiaries. Control is necessary to ensure that there are sufficient funds on all bank accounts and there’s more visibility into the company’s liquidity position.
Also, having processes and adequate workflows is important for ensuring the security of the company’s funds.
In our ‘Successful Businesses Excel at Cash Management’ report commissioned by Forrester in 2021, 78% of global decision-makers shared that they believe tools to control how batches are routed through the system are valuable for their treasury and cash management activities.
Multiple users & compliance
When there are many users, having audit trails and history available and a process for multiple people verifying outgoing payments can ensure the company’s compliance.
Easy to add new bank connections
Having the availability to add new bank connections is a vital benefit of using a payment hub as you can automate the communication between your company and the bank.
The payment hub enables you to add new source systems as your company is growing for example via mergers and acquisitions.
It’s also quite typical that a company starts with one country using the payment hub and only later do they try to add more entities and users.
Security of the payment hub
A cloud-based payment hub comes with the security of the cloud. Having single-sign-on (SSO) and multi-factor authentication (MFA) are essential features and anomaly detection and sanction screening are becoming a must for many at the moment.
Transformational times call for improved payment processes
As we have predicted earlier this year in our article on cash management trends, payment solutions for cash flow efficiency will be on the rise this year and in the years to come. Beyond improving treasury and finance processes, compliance is a major driver in the shift towards adapting enterprise payment systems to increase payment efficiency and security.